Airway Medix (WSE:AWM) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Airway Medix S.A. (WSE:AWM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Airway Medix

What Is Airway Medix's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Airway Medix had zł14.2m of debt, an increase on zł9.27m, over one year. On the flip side, it has zł5.05m in cash leading to net debt of about zł9.12m.

How Healthy Is Airway Medix's Balance Sheet?

We can see from the most recent balance sheet that Airway Medix had liabilities of zł17.8m falling due within a year, and liabilities of zł5.09m due beyond that. On the other hand, it had cash of zł5.05m and zł2.29m worth of receivables due within a year. So its liabilities total zł15.5m more than the combination of its cash and short-term receivables.

Airway Medix has a market capitalization of zł41.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Airway Medix's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Airway Medix doesn't have significant operating revenue, shareholders must hope it'll ramp sales of its new medical tech as soon as possible.

Caveat Emptor

Importantly, Airway Medix had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable zł15m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł4.9m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Airway Medix (3 are significant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.